This is great news if you're a homeowner who can't repay your debts, not so great news if you would rather not see tax dollars subsidizing second mortgages. During the housing boom, many homeowners took out a second mortgage - either a home equity loan or line of credit - to make a down payment or pay for home improvements, medical bills, college bills, cars, vacations or other expenses.
The new plan builds on a mortgage modification announced in February called Making Home Affordable. That plan, which applies to first mortgages, encourages lenders to reduce payments for homeowners in danger of foreclosure by cutting their interest rate, temporarily reducing the balance and other means. The government makes payments to lenders that partially offset the reduced payment. It also pays servicers who get homeowners into modified mortgages and homeowners who stay current with their reduced mortgage payments.
The plan, like others before it, has had limited success because so many people who can't pay their first mortgage can't pay their second. "We estimate up to 50 percent of at-risk mortgages have second liens," the Treasury Department says.
Second mortgages present a variety of problems: If a homeowner can get a first mortgage modified but can't afford the second, he may still end up in foreclosure.
Also, the first-mortgage holder might be reluctant to modify its loan if the second-mortgage holder doesn't. Why? Because if the modification gives the homeowner more cash to pay his second mortgage, the second mortgage becomes more valuable, but the first-mortgage holder takes the hit.
Finally, a second mortgage can make modifications more legally complex.
The new plan tries to solve those problems by providing incentives to reduce or extinguish second mortgages.
Lenders can get a partial subsidy for reducing the interest rate on a second mortgage to 1 or 2 percent. As an alternative, lenders who extinguish a second mortgage will get a one-time payment equal to 3 to 12 percent of the unpaid balance.
Servicers who get a second-mortgage modified can earn up to $500 up-front plus $250 per year for three years as long as the first mortgage remains current. For getting a first mortgage modified, servicers can earn up to $1,000 up-front plus $1,000 a year for three years.
Homeowners who stay current on a modified second mortgage can receive "success payments" of up to $250 per year for five years. This is in addition to the success payments they get on the first mortgage: up to $1,000 a year for five years. Both payments go toward reducing the balance on the first mortgage.
Eligibility outlined
To be eligible for the second-mortgage modification, the homeowner must be eligible for first-mortgage modification under the Making Home Affordable program. To qualify, the first mortgage must have been originated on or before Jan. 1, 2009. The home must be an owner-occupied, single-family property (one to four units) used as a primary residence. The balance on the first mortgage cannot exceed $729,750. The balance on the second mortgage also cannot exceed $729,750, although the two loans together can exceed that amount. (Higher limits apply to two- to four-unit properties.)
For other guidelines, see links.sfgate.com/ZGYH.
Treasury says that 13 servicers representing 75 percent of all mortgages have signed on to the first-mortgage modification plan. At least five have agreed to sign on to the second-mortgage modification plan: Bank of America, Wells Fargo, Chase, CitiMortgage and GMAC. Both plans are being financed out of the Troubled Assets Relief Plan or TARP.
A cheaper idea
Edward Morrison, a Columbia University law professor, applauds the new plan, but says the government could have done it more cheaply.
In a paper he co-authored in January, he proposed paying second-lien holders who extinguished loans 5 percent of the balance, not to exceed $1,500 per property. Under that scenario, he figures that about 1.1 million second liens would be extinguished at a cost of $1.65 billion or less.
"Obama's plan looks, generally, more generous," he says. It would pay second-lien holders 3 to 12 percent on balances up to $729,750. On an average second mortgage, which Morrison says is $68,000, the payment would range from $2,040 to $8,160.
Obama's plan envisions modifying or extinguishing 1 million to 1.5 million second mortgages.
"His expectation for success seems reasonable, but I think he is paying far too much," Morrison says.
For more on the second-lien plan, see links.sfgate.com/ZGYI. The new second-lien program does not apply to mortgages refinanced under Hope for Homeowners, a program run by the U.S. Department of Housing and Urban Development. However, the government is working to provide incentives to second-lien holders to extinguish their loans when the first is refinanced under Hope for Homeowners.
The new second lien program also does not apply to mortgages refinanced by Fannie Mae and Freddie Mac under a program that also falls under Making Home Affordable.
This article appeared on page C - 1 of the San Francisco Chronicle